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The ABC mechanism: an incentive compatible payoff mechanism for elicitation of outcome and probability transformations

Published online by Cambridge University Press:  14 March 2025

Yi Li
Yi Li*
Affiliation:
Department of Accounting, Economics and Finance, School of Business, Slippery Rock University, 1 Morrow Way, Slippery Rock, PA 16057, USA
*
[email protected]
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Abstract

When it comes to experiments with multiple-round decisions under risk, the current payoff mechanisms are incentive compatible with either outcome weighting theories or probability weighting theories, but not both. In this paper, I introduce a new payoff mechanism, the Accumulative Best Choice (“ABC”) mechanism that is incentive compatible for all rational risk preferences. I also identify three necessary and sufficient conditions for a payoff mechanism to be incentive compatible for all models of decision under risk with complete and transitive preferences. I show that ABC is the unique incentive compatible mechanism for rational risk preferences in a multiple-task setting. In addition, I test empirical validity of the ABC mechanism in the lab. The results from both a choice pattern experiment and a preference (structural) estimation experiment show that individual choices under the ABC mechanism are statistically not different from those observed with the one-round task experimental design. The ABC mechanism supports unbiased elicitation of both outcome and probability transformations as well as testing alternative decision models that do or do not include the independence axiom.

Keywords

Experimental designPayoff mechanismIncentive compatibilityDecision theory under risk

JEL classification

C90: General D81: Criteria for Decision-Making under Risk and Uncertainty D80: General
Type
Original Paper
Information
Experimental Economics , Volume 24 , Issue 3 , September 2021 , pp. 1019 - 1046
Copyright
Copyright © 2020 Economic Science Association

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Footnotes

Electronic supplementary material The online version of this article (https://doi.org/10.1007/s10683-020-09688-2) contains supplementary material, which is available to authorized users.

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